Around the country, organizations at the frontlines of the foreclosure crisis are counting on Harris—the first woman and first person of color to hold the job of California’s top cop—to use the powers of her new office to investigate, prosecute, and negotiate with businesses that have preyed on vulnerable homeowners and renters. According to advocates, these include not just financial institutions, but also law firms, loan-modification specialists, credit-repair agencies, and debt collectors.

States have unique regulatory powers that give them an advantage over federal agencies and lawmakers in protecting the rights of homeowners and consumers. The role of the states is even more important now that the U.S. House of Representatives is under GOP control and tougher legislation out of Congress appears unlikely for the foreseeable future.

“Attorneys general are the tip of the spear in terms of what’s happening in terms of investigation and negotiation,” says Mike Calhoun, president of the Center for Responsible Lending in Washington, D.C. “California plays a critical role given the size of its housing market and the extent of the foreclosure crisis there.”

California is already a part of a 50-state investigation targeting so-called “robo-signers,” mortgage servicers that approved hundreds of thousands of foreclosures without scrutinizing the underlying documents to see whether the seizures were legal or fair.

But Sacramento has played a secondary role in the robo-signing probe and other cases, despite the fact that California has the largest number of foreclosures and delinquencies in the country and the second-highest per-capita rate of foreclosures.

“It would be great for our new AG to show national leadership on this issue,” says Marcia Rosen, executive director of the National Housing Law Project, a nationwide tenants advocacy group based in San Francisco.

“California is a leader in foreclosures—we need to be a leader in loan modifications,” adds Orson Aguilar, executive director of the Greenlining Institute. “We need to make sure our families are getting the best deal.”

A New Top Priority—and a Plan

During her seven years as San Francisco’s district attorney, it was in the criminal justice area where Harris made her national reputation, advocating “smart on crime” ideas to reduce recidivism and prison overcrowding that have been influential from Philadelphia to Dallas and beyond.

But during her campaign for attorney general against Republican Steve Cooley, Harris pledged that helping California homeowners victimized by predatory financial institutions would also be a top priority.

California’s foreclosure crisis has decimated urban communities and parts of the Central Valley. Approximately two-thirds of the state’s foreclosures have been among African-American, Hispanic and Asian borrowers, according to Harris’s campaign. Nationally, 17 percent of all Latino homeowners and 11 percent of African Americans have either lost their home or are at imminent risk of doing so, the campaign said.

An analysis last June by the Center for Responible Lending found that a home owned by a black family was 76 percent more likely to go through foreclosure than a home owned by a white family.

“The victims are these people doing everything they were supposed to do to realize the American dream,” Harris said in an interview in October. “These are hardworking people who followed the rules, were paying their taxes and bills on time, and then they find themselves out of work, and the predators come in. They stripped these folks of their remaining assets and all of their dignity. And it’s been going without consequence.”

"The damage to families and individuals is profound," she continued. “…. The issue goes beyond the commission of a crime, but what it does to demoralize a community. It includes the effect on children in school, the effect on marriages. So it's a very big issue. And it's something that has to be addressed."

Harris’s proposals—part of a Homeowner Relief and Protection Plan outlined in October—include creation of an Attorney General’s Office Strike Force to expand investigation and prosecution of predatory lenders; a Foreclosure Oversight Czar to ensure that businesses comply with state consumer protection laws; and new programs to help consumers repair the damage caused by fraudulent or unfair foreclosures.

Assemblyman Mike Davis (D-Los Angeles), a Harris supporter, has said he would work to introduce a legislative package implementing her ideas early in 2011.
Brown Missing in Action

Harris has frequently praised her predecessor, Jerry Brown, for his efforts at fighting mortgage-lending fraud, such as a 2008 settlement he helped broker with Bank of America and Countrywide, one of the largest issuers of toxic mortgages. The $8.68 billion deal called for BofA to modify the subprime loans of nearly 400,000 homeowners nationwide, suspend foreclosures for eligible borrowers, eliminate certain fees, and compensate people displaced from their homes before the settlement.

But advocates for homeowners say that the former AG, who spent the last year waging his own hard-fought campaign for the governorship, has largely stayed out of the fray.

“Jerry Brown, when it comes to the issue of foreclosure, has done very little,” Aguilar assertss. “After some symbolic leadership early on, there was no real follow-up. The [Countrywide/BofA deal] was supposed to fix the BofA problems. That obviously hasn’t happened.”

Meanwhile, the state legislature has had its own difficulties enacting laws to help distressed homeowners. In June, for example, the Assembly rejected a so-called Homeowners Bill of Rights that would have increased the number of loan modifications for troubled borrowers. The vote was mostly along party lines, with Democrats favoring the bill and Republicans voting no. (The state Senate had earlier passed the bill by an overwhelming majority.)
Powerful Legal Weapons

Now, with the distractions of the campaign behind lawmakers, and the Legislature more firmly under Democratic control, homeowner advocates are hopeful that California will make up for lost time. Several of the state attorneys general who had been most aggressive on the foreclosure issue—including Democrats Richard Cordray of Ohio and Terry Goddard of Arizona—lost their races in November, giving Harris an opening to play an immediate national leadership role.

What’s more, Aguilar points out, the Wall Street reform law signed by President Obama last July includes provisions that allow states to pass tougher regulations of financial institutions without fear that the federal government will step in and overrule them, as happened during the Bush administration. “Before the states were handcuffed,” Aguilar says, “but now they have more power.”

Yet even without this new tool, California has plenty of authority to act on its own. “California’s Fair Business Practices Act is one of the more potent [consumer-protection laws] in the country,” notes the Center for Responsible Lending’s Calhoun. He would like to see Harris apply the law aggressively against loan servicers—the companies that actually own many troubled mortgages and that make the decision to foreclose. “They are usually unregulated and when they impose fees, they get to keep those fees: late fees, property review fees, forced insurance.”

“At their most basic, foreclosures are about real estate law, which is a very local, state-by-state issue,” adds David Abromowitz , a Boston-based real estate attorney and senior fellow at the Center for American Progress focusing on housing policy. “The process to foreclose, the procedures to follow to be fair to the homeowner and fair to the lender— those are all set up by state law.”

Unlike many states, California is a so-called “nonjudicial foreclosure state”—meaning it does not require lenders and servicers to go to court before seizing a property, Calhoun says. But Harris and her office still have the power to force financial institutions to prove that their foreclosures standards are legally fair and that they followed their own rules to the letter, he adds.

“The leverage [is] that many of the lenders will find it difficult, if not impossible, to meet the legal standards,” Calhoun says.

Going after the mortgage servicers could also benefit consumers seeking loan modifications. “The same companies and often the same staffs that have totally botched the foreclosure process are the same ones that are supposed to be providing loan modifications,” Calhoun says.

Going Back to the Beginning

Abromowitz would like to see Harris “go back to the beginning of the relationship between the homeowner and the servicer to see if the initial loan itself was done in misleading or fraudulent way.”

“People talk about the foreclosure crisis as if it was about people buying homes,” Abromowitz points out. “But many of the bad loans were refinancings, not purchases, especially in areas where there were concentrations of minority homeowners. A lot of homeowners were sold hazardous loans, and very often it’s those loans, those refinancings, that have sucked peoples’ life savings into the bank accounts of the loan servicers. Will she go back and look at those original, underlying transactions?”

Another area where Harris could decide to become involved is the issue of who really has the right to foreclose, Abromowitz adds. “The lending system that was set up that led to this big boom in subprime and risky loans depends on loans being sold quickly to investor pools and transferred—sometimes three, four, or five times. There are basic legal questions about how you transfer loans and who has the right to foreclose. There are some cases around the country where judges have said, ‘I’m not accepting at face value that this loan servicer has the legal right to seize this property.'"

Finally, Abromowitz believes Harris could have a major national impact if she can persuade—or force—mortgage companies to go through mandatory mediation with homeowners before a property is seized. “It is possible for a settlement in a state the size of California to show how [mandatory mediation] could work.”

The Forgotten Victims: Renters

Marcia Rosen, of the National Housing Law Project, is hopeful that Harris will not forget one of the most overlooked categories of victims of the foreclosure crisis—tenants.

“In California, at least 40 percent of foreclosure properties are rented,” she notes. In 2009, Congress passed the Protecting Tenants at Foreclosure Act (PTFA), which requires financial institutions to honor rental leases that are in place and give month-to-month tenants a minimum of 90 days’ notice before they are evicted because of a foreclosure.

But, Rosen adds, many lenders and mortgage servicers continue to violate tenants’ rights. “There are widespread documented breaches of this—tenants lose their homes every day, they pay their rent and don’t know that a foreclosure is even happening until the sheriff appears.” Even in cases where the foreclosure wasn't valid, evicted tenants have little recourse. "Sometimes it can go on their credit report that they’ve had an eviction and they didn’t have anything to do with it,” Rosen says.

In October, tenants’ organizations petitioned then-AG Brown to investigate the continued abuses and violations of the PTFA, but Rosen adds: “We don’t know the status of the investigation and we haven’t seen any enforcement come out of it.”

Rosen is hoping that Harris will target real estate brokers and law firms that may help perpetuate these violations. “There are law firms that work for the banks and do almost all of the eviction business for the banks. They are eviction mills. They are participating as part of a conspiracy to wrongfully deprive people of their homes and tenancies.”